All Politics is now Global

China eyes post-Chavez oil axis

China is set to overtake the United States as the world’s largest importer of oil this decade. While the expansion of China?’s economy has slowed from a breakneck 10% yearly rate to a still-formidable 7% per annum, the economic metamorphosis of the Middle Kingdom is having huge impacts on global energy markets.

The growing ranks of China’s middle class increasingly aspire to a lifestyle – and level of consumption – that approximates the patterns of their counterparts in the world’s richest countries. The death of Venezuelan president Hugo Chavez has further highlighted China’s need for the lifeblood of a modern economy and the economic and geopolitical threats China’s dependence on imported energy hold for the leadership in Beijing.

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The spice must flow

Beyond the economic realm, China’s increasing dependence on imported oil has immense geopolitical implications. First, China’s deepening political relations with energy-rich nations are driven primarily by the all-important Chinese Communist Party goal of ensuring domestic stability through continued economic growth. Chinese ties with Russia, Iran, and Venezuela are motivated more by the thirst for energy than a desire to form some sort of anti-Western axis.

China’s expanding presence in the Indian Ocean is also primarily driven by energy geopolitics. New Delhi (understandably) fears a strategic encirclement by China’s ties with Pakistan and Myanmar. However, China’s involvement in those two countries is motivated, at least in part, by a need for reliable overland energy supplies. A pipeline running from the Myanmar coast to China’s southwest is due to start operations this year, and China’s investment in Pakistan’s Gwadar port is largely inspired by a wish for more direct access to Middle Eastern oil.

Nearly three-quarters of China’s crude oil imports come from the Middle East and Africa. These supplies must at present pass through the bottleneck of the Strait of Malacca, and the contested South China Sea. The United States is very publicly repositioning the majority of its fleet to the Pacific, and tensions are mounting between China and its neighbors over sovereignty over the waters of the East China and South China Sea, where the extent of oil and gas reserves is still being estimated but could be considerable. Beijing fears that any armed confrontation in the maritime region could threaten supplies of imported energy.

The B(oil)ivarian Revolution

China has taken a keen interest in Venezuela, and in the wake of Hugo Chavez’s passing China’s state-run media has featured extensive coverage of the mourning masses of the socialist Chavistas, in scenes reminiscent of China’s heady revolutionary days. China has much at stake in Venezuela – a country that recently overtook Saudi Arabia as the holder of the world’s largest oil reserves.

Beijing has lent Venezuela US$42 billion in recent years. These funds are being repaid with Venezuelan oil at below-market rates. China is already Venezuela’s number two trading partner (after the United States), and is set to increase imports of Venezuelan oil. However, any political transition that sees Chavez’s supporters lose power could threaten China’s massive investments in the South American nation.

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The financial heft of China’s state-owned oil firms has allowed it to make major energy investments in the last decade, leading to serious concerns amongst the US leadership. There are fears that China is seeking to “lock down” oil reserves before the advent of “peak oil” and a subsequent exponential rise in petroleum’s value. The China National Offshore Oil Corporation (CNOOC) recently bought Canada’s Nexen, a major stakeholder in Canadian oil sands and the Gulf of Mexico. CNOOC’s 2005 bid to buy Unocal was heavily opposed in Washington. There are Western concerns that China’s state-owned firms could use their control over petrochemicals for their own exclusive strategic purposes.

CNOOC chief executive Fanrong Li recently sought to dispel such fears at an energy conference in Houston. He dismissed the notion that China intends to exclusively “hold each barrel” it extracts: “This notion does not make any commercial sense. We sell our products at [the] best available distribution systems to maximize commercial value.” [3] Essentially, Li has stated that CNOOC’s acquisitions are driven more by a desire for profit than a Chinese yearning for strategic energy ascendancy.

Li’s reassurances seem to ring true, at least for the time being. Most of the oil that Venezuela owes to China never arrives in China’s ports. According to Kevin Jianjun Tu of the Carnegie Endowment for International Peace, “Chinese NOCs [national oil corporations] sell most of their Venezuela-sourced oil in the open market in order to avoid the high logistic costs associated with long-haul shipping to China.” [4] In other words, China receives Venezuelan oil at a discount, and then sells this oil at market prices – presumably to refineries in the United States.

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Beijing will continue an economically ambitious – and strategically conservative – effort to secure its share of the world’s limited fossil fuels. Expect China to outstrip the United States as the world’s largest importer of petroleum, with important economic and political ramifications for the entire planet.